Generalist investors have been warier of real estate investment trusts than many in the REIT space hoped when real estate got its own industry classification in 2016, several industry figures said.
S&P Dow Jones Indices created a separate sector for real estate companies in its Global Industry Classification Standard, or GICS, in August 2016, breaking REITs out of the financials sector. At the time, proponents of the change within the real estate industry argued that the shift would force generalists to take positions in real estate, and to allocate some investments to the sector to keep pace with benchmarks.
In fact, though, many REIT executives have been privately wondering since the change what they can do to attract more generalists, Park Hotels & Resorts Inc. Chairman, President and CEO Thomas Baltimore Jr. said in a panel appearance. Baltimore, who is also the 2018 chair of the National Association of Real Estate Investment Trusts, spoke at the industry group's REITWeek 2018 conference.
James Connor, chairman and CEO of Duke Realty Corp., said the company's shareholder base "has not changed that much" since the GICS change. "We've got a few more generalist investors, but not nearly the number that we would have anticipated, or at the levels that we would have anticipated," Connor said.
Connor said some of the generalists' reluctance may stem from unfamiliar earnings metrics unique to the REIT industry, and some may be related to concerns about rising interest rates, which are commonly believed to hurt real estate share prices.
Moreover, he said, there was a popular belief that the tax reform bill passed in 2017 would benefit other corporations more than it would REITs.
"We continue to talk to a lot of them at conferences like this, and non-deal road shows, in hopes of being able to familiarize them with us and our sector and what we're doing, what we think the outlook is," Connor added. "But I would tell you, thus far it's been a little disappointing."
Sherry Rexroad, managing director and chief investment officer for the global real estate securities group at BlackRock Inc., said underweighting REITs was a major component of the strategy that led generalist investors at the firm to outperform benchmarks in 2017. While the S&P 500 grew by more than 20% over the course of the year, she noted, REIT index gains were in the single digits.
"The generalists at BlackRock do now have dedicated analysts to the sector," Rexroad said. "But I would also tell you that the number of calls that I get asking about REITs is minimal now, relative to say three, four years ago."
Jeffrey Horowitz, global head of real estate, gaming and lodging investment banking at Bank of America Merrill Lynch, said a rise in interest rates around the time of the GICS change likely hurt REITs at a critical time. Still, he said, "I think when you have a separate classification that exists, long-term it's a great thing, because we're an industry that should stand on its own and shouldn't be part of something else."
Citi equity research analyst Michael Bilerman noted that generalist active mutual funds account for roughly 7% to 8% of REIT equity investment. While that level is "still meaningfully underweight to where a benchmark index weight should be," he said, it actually has doubled over the past five years.
"There has been a pretty big sea change in terms of interest in the sector," Bilerman said. "It should be a lot higher, but it's narrowed the gap."
S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.
